Interim Results for the six months ended 30 June 2010
(Thomson Reuters ONE) -
16 September 2010
Pacific Alliance China Land Limited
('PACL' or the 'Company')
Interim Results for the six months ended 30 June 2010
Pacific Alliance China Land Limited ('PACL' or the 'Company'), the closed-end
investment company admitted to trading on AIM and focused on investing in a
portfolio of existing properties, new developments, distressed projects and real
estate companies in Greater China, today announces its financial results for the
six months ended 30 June 2010.
Financial Highlights
* As at 30 June 2010, the Company's unaudited total net asset value (NAV)
was US$205 million. This equates to US$1.4155 per share, representing a
2.58% increase from the 31 December 2009 Audited Financial Statements and an
annualised increase of 14.4% since inception.
* The Company's share price closed at US$0.83131 on 30 June 2010,
representing a 17.5% increase compared to the same period the previous year.
Portfolio and Fund Developments
* During the period the Company was able to realise a Renminbi equivalent
of US$9.2 million from Project Silk, a bridge financing project located in
Hangzhou. The investment achieved an IRR of 21% over a two-year period.
* In May, the Company and other consortium investors completed the sale of
50% of their interest in Hainan Airport Group at an approximate 30% premium
compared to the investment cost.
Significant Subsequent Events
* On 9 September 2010, the Company announced a US$22 million investment
for a 15% equity interest in a primarily residential development project
with the Shanghai Aijia Investment Group. The project is located in a third
tier city, where investment fundamentals remain sound, and is expected to
achieve a minimum preferred cash multiple of 1.4x over the proposed three
year term.
Commenting on the results, Patrick Boot, Managing Director, Pacific Alliance
Real Estate Limited, said: "Despite a challenging market environment, the
Company performed consistently in the first half of 2010. The stability of the
Company's value set against the wider backdrop of a softening market environment
can largely be attributed to the strategy of building and maintaining a high
quality diversified portfolio. The Company's recent investment in a third tier
city development project will allow PACL to develop a strategic partnership with
a well regarded regional developer with the potential for further investment
opportunities. This is illustrative of the high quality investment opportunities
we are sourcing despite current market conditions. We will continue to monitor
conditions closely and are well positioned to take advantage of attractively
priced investment opportunities."
Copies of the report are being sent to registered shareholders. A copy of the
report will be posted on the Company's website (www.pacl-fund.com).
Enquiries:
For more information, please contact:
MANAGER: LEGAL COUNSEL:
Patrick Boot, Managing Director Jon Lewis, General Counsel
Pacific Alliance Real Estate Limited c/o Pacific Alliance Group
16/F, St. John's Building 16/F St. John's Building
33 Garden Road 33 Garden Road Central,
Central, Hong Kong Hong Kong
T: (86) 21 6288 3788 T: (852) 2918 0088
F: (86) 21 6288 9272 F: (852) 2918 0881
pboot(at)pacific-alliance.com.cn jlewis(at)pacific-alliance.com
BROKER: NOMINATED ADVISER:
Hiroshi Funaki Philip Secrett
LCF Edmond de Rothschild Securities Grant Thornton Corporate Finance
T: (44) 20 7845 5960 T: (44) 20 7383 5100
F: (44) 20 7845 5961 Philip.J.Secrett(at)gtuk.com
funds(at)lcfr.co.uk
MEDIA RELATIONS:
Sophie Hoggarth
Pacific Alliance Group
T: (86) 21 6113 5818
shoggarth(at)pacific-alliance.com
Andrew Walton
Financial Dynamics, London
T: (44) 20 7269 7100
Christine Wood / Queenie Tsao
Financial Dynamics, Asia
T: (852) 3716 9800
Notes to Editors:
Pacific Alliance China Land Limited ("PACL") (AIM: PACL) is a closed-end
investment company that was admitted to trading on the AIM Market of the London
Stock Exchange in November 2007. PACL is focused on investing in a portfolio of
existing properties, new developments, distressed projects and real estate
companies in Greater China.
For more information about PACL, please visit: www.pacl-fund.com
Pacific Alliance China Land Limited is a member of Pacific Alliance Group
("PAG"), one of the leading Asian alternative investment managers. Founded in
2002, PAG manages funds covering private equity, real estate, hedge fund and
distressed investments and has offices across Asia including Hong Kong,
Shanghai, Beijing and Tokyo.
For more information about Pacific Alliance, please visit
www.pacific-alliance.com
Chairperson's Statement
Pacific Alliance China Land Limited performed consistently during the first half
of 2010 despite a challenging market environment. The Company's net asset value
(NAV) as of 30 June 2010 was US$205 million, US$1.4155 per share, indicating an
increase of 2.58% for the first half of 2010. The investment manager's
persistent attention to project quality and diversification has proven effective
in maintaining investment values during a sustained period of fiscal tightening
measures implemented by the Chinese government.
The Chinese government remains vigilant in its attempts to cool escalating
residential prices and its efforts are impacting this market segment. Individual
investors/speculators have been taken out of the market with the introduction of
a policy that forbids mortgage lending on an individual's third home. As a
result of this action, transaction volumes across the country have decreased
significantly, with some cities witnessing a decrease of over 60% from last
year. Residential prices have also begun to decline in some markets, especially
in those areas with a high concentration of speculative activity, such as Hainan
and Shenzhen. If the decline in transactions continue at the current rate this
should result in widely anticipated further price corrections, as more
developers and property owners become increasingly stretched due to high
inventories, low take up rates and tighter credit.
The investment manager has structured the portfolio to remain well positioned in
a softening market environment. Residential investments have been made primarily
on the identification of markets and projects with high end-user demand. In
addition, the multi-strategy, diversified approach which has enabled the
investment manager to achieve attractive risk adjusted returns during similar
volatile periods should prove to be effective again. Further government policy
initiatives continue to support domestic consumption as a top priority. This
supports the investment manager's strategy of diversification into the retail
property sector.
The investment manager continues to monitor market conditions closely and look
for opportunities arising from the current market disruptions. The Company is
well positioned to take action when pricing becomes attractive.
As a final point, the Board of Directors and the investment manager would like
to take this opportunity to thank you for your continuing support. We are proud
of the Company's performance in a very difficult global market environment, and
we remain committed to working hard to achieve long-term value for our
shareholders.
Margaret Brooke
Chairperson
Investment Manager's Report
Portfolio Performance
As at 30 June 2010, the Company's unaudited total net asset value ("NAV") was
US$205 million, at US$1.4155 per share. This is a 2.58% increase from the 2009
Audited Financial Statements and an annualized increase of 14.4% since
inception. Independent valuations are currently undertaken on a quarterly basis.
Bridge financing collateral, co-development projects, and other assets and
platform investments are valued by recognized international valuation firms and
real estate appraisers.
On 30 June 2010, the Company's share price closed at US$0.83131, a 17.5%
increase year-on-year and a 41% discount to the unaudited NAV per ordinary
share. PACL's share price has outperformed major benchmark indices including the
FTSE 350 Real Estate Index and the FTSE AIM All-Share Index on a consistent
basis.
30 June 2010
US$
Realized Gain
Bridge Financing Income 6,616,553
Deposit Interest 294,949
Other Income 1,209,875
?????????
8,121,377
Change in Unrealized Gain
Pre-IPO Financing 1,563,433
Bridge Financing Income (3,801,564)
Co-Development 3,924,948
Other real estate investments 2,295,425
Share of profits payable to PACL II (5,294,247)
Foreign exchange 794,544
?????????
(517,461)
?????????
7,603,916
?????????
Portfolio Summary
As at 30 June 2010, the Company held investments with a cost of approximately
US$156 million and fair value of US$257 million. The Company's portfolio is
diversified across five strategies including Bridge Financing, Co-Development,
Pre-IPO Financing, Platform Investment and Asset Acquisition.
Breakdown of Investments by Strategy
Type of Investment % of Total
Cash 23
Bridge Financing 20
Platform Investment 19
Asset Acquisition 16
Pre-IPO Financing 12
Co-development 10
Investments Fair Value US$ Type of Investment % of Total Location
Project Malls 62,384,862 Platform Investment 18.82% Mainland China
Project Diplomat 51,257,507 Asset Acquisition 15.46% Beijing
Project Speed* 48,375,587 Bridge Financing 14.59% Guandong
Hainan Airport 4.37% Mainland China
Group* 14,500,000 Pre-IPO Financing
Project Auspice 22,561,380 Pre-IPO Financing 6.81% Mainland China
Project Shanghai 5.29% Huzhou
Jingrui* 17,523,011 Co-Development
Project Beijing 4.31% Beijing
Olympic* 14,287,623 Bridge Financing
Project Blue Bird 4.55% Qingdao
* 15,094,391 Co-Development
Project Silk* 10,842,715 Bridge Financing 3.27% Hangzhou
Cash 74,691,194 Cash 22.53%
TOTAL 331,518,270 100.00%
Note (*) The investment value includes an amount attributable to the PACL II
shareholders.
Investment Strategy
The series of intervening measures introduced by the Chinese government to cool
the residential market have effectively prevented prices from increasing and
caused a significant decrease in market transactions. If the decrease in take-up
continues, inventories will increase and we will expect to see further price
reductions during the next six to 12 months.
The investment manager has acted prudently and monitored these trends closely
since the beginning of 2010. No new investments have been made during the first
half of the year and the investment manager has instead focused on: speeding up
the sales of the co-development projects, actively building the pipeline for the
bridge loan portfolio, and searching for co-development opportunities (with
preferred returns) in second and third tier cities where prices are still very
reasonable and do not have unreasonable price increases like many of the first
tier cities.
Looking ahead, the investment manager is also searching for distressed
opportunities that may emerge in regions and sectors that are more heavily
affected by the government's intervention measures. Over the past three years
the investment manager's unique multi-strategy approach has resulted in positive
performance and the intention is to continue to utilize this approach.
Bridge Financing Strategy
In response to the government's credit-tightening measures and developers'
expanding inventories, small to medium-sized developers may find themselves in
tighter cash-flow situations. The Company's bridge-loan solutions are
well-positioned to allow these companies to avoid the need to fire-sale assets.
The investment manager is starting to see renewed interest from the market in
this area and will focus on projects that have sound real estate fundamentals
and low loan-to-value ratios.
Distressed Opportunity
China witnessed a rapid appreciation in residential prices during the second
half of 2009 and the beginning of 2010. The investment manager's experience
shows that positive market sentiment often causes developers to pursue highly
priced land acquisitions and inappropriate use of leverage. The investment
manager is closely monitoring these types of situations, particularly in areas
hardest hit by the government tightening measures. The investment manager has
the necessary tools and experience to source and manage this type of
opportunity.
Co-Development Strategy
The investment manager sees better co-development opportunities in third-tier
cities where there is a strong end-user demand and low vacancy rates. These
cities experienced moderate growth in 2009 and housing prices are much more
affordable than primary cities. They will also benefit the most from the next
round of government supported urbanization and infrastructure improvements. With
the recent tightening measures now taking effect, the investment manager is
seeing small and medium sized developers becoming much more flexible when
negotiating preferred return investments, and the investment manager intends to
pursue these types of returns.
Value-Added Asset Acquisition Strategy
In contrast to residential markets, where prices have increased sharply and are
poised to decline, existing or nearly completed retail properties with poor
lease-up and/or ineffective management teams can have high value-add potential.
The investment manager continues to look for opportunities where it can add
value through the deep operational expertise of its management team.
Platform and Pre-IPO Financing
Financing channels for developments are becoming much more restricted than they
were a year ago. This may force some developers to consider strategic investment
at a corporate level with the potential for attractive pricing in the second
half of 2010. This opens up future IPO and M&A opportunities when the market
recovers. The investment manager will only select quality companies with
impressive track records, a competitive edge and a high-quality land bank.
Conclusion
The Chinese property market has experienced a roller-coaster ride over the past
three years in terms of shifts in government policy, price swings and changing
market sentiment. These market changes provide the Company not only with
challenges but also exciting investment opportunities. The investment manager
will continue to implement its unique multi-strategy approach, which has proven
to be an excellent method of achieving capital protection and asset appreciation
in different phases of the market cycle. Alongside the objectives of persistent
attention to project quality and portfolio diversification, the investment
manager believes the Company is well positioned to ensure sustainable
development.
Consolidated Statement of Assets and Liabilities as at 30 June 2010
As at As at
30 June 31 Dec
Note 2010 2009
US$ US$
Unaudited Audited
Assets
Investments, at fair value (Cost:
US$156,021,545
2009: US$189,143,890) 3(a),4,5 256,827,077 286,592,862
Amounts due from related parties 3,686 -
Other receivables 260,686 3,648,352
Other assets 232,225 895,509
Restricted cash 3(e),6 - 12,000,000
Cash and bank balances 3(d) 74,691,194 81,614,495
?????????? ??????????
Total assets 332,014,868 384,751,218
----------------- ---------------
Liabilities
Amounts due to PACL II Limited 10(a) 101,004,580 115,042,310
Performance fee provision 10(b) 624,809 14,424,994
Bank loans 6 - 12,000,000
Provision for taxation 8 25,286,234 30,119,037
Advanced receipt on disposal of
investments - 2,586,020
Accrued expenses and other payables 28,750 1,036,990
?????????? ??????????
Total liabilities 126,944,373 175,209,351
---------------- ---------------
Net assets 205,070,495 209,541,867
?????????? ??????????
Analysis of net assets
Share capital 7 1,898,339 1,898,339
Share premium 7 187,935,554 187,935,554
Capital surplus 7 1,816,917 1,816,917
Treasury shares 7 (42,776,969) (34,969,715)
Retained earnings 56,196,654 52,860,772
?????????? ??????????
Net assets (equivalent to US$1.4155
(2009: US$1.3800) per share based on
144,871,282 (2009:151,842,044) issued
and outstanding shares) 205,070,495 209,541,867
?????????? ??????????
Approved by the Board of Directors
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Schedule of Investments as at 30 June 2010
As at 30 June 2010 As at 31 Dec 2009
% of % of
% of effective Cost/ Fair value % of effective Cost/ Fair value
Investments net equity Principal US$ net equity Principal US$
assets interest US$ assets interest US$
held held
COMMON 87.49 91.44
STOCKS
Aviation, 6.92 12.34
China
Hainan
Airport
Group
Limited 6.92 4.90 10,002,500 14,500,000 12.34 20,000,000 25,866,667
4.90
Limited
Real estate
development,
China 80.57 79.10
China
Beijing
Hines Jing
Sheng 24.46 40.00 32,800,000 51,257,507 24.66 32,800,000 51,678,000
Real Estate 40.00
Development
Co. Ltd. (1)
Dalian Wanda
Commercial 10.77 0.50 22,561,380 22,561,380 10.70 22,414,500 22,414,500
Real Estate 0.50
Co. Ltd.
Huzhou
Jingrui Real 8.36 49.00 11,400,133 17,523,011 9.88 14,915,165 20,706,779
Estate 49.00
Co. Ltd.( 1)
Qingdao
Vanke Real 7.20 40.00 5,898,400 15,094,391 5.44 5,860,000 11,391,905
Estate 40.00
Co. Ltd. (1)
SZITIC
Commercial 29.77 30.00 12,500,000 62,384,863 28.42 12,500,000 59,553,357
Property Co. 30.00
Ltd.
BONDS 23.09 21.46
Real
estates, 23.09 21.46
China
Times
Property 23.09 40,000,000 48,375,587 21.46 40,000,000 44,976,526
Holdings
Co. Ltd.
LOANS
RECEIVABLE
Real
estates, 11.99 23.86
China
Spirit
Charter 6.82 13,607,260 14,287,623 6.69 13,607,260 14,023,657
Investment
Limited
Zhonghong
Xingye Real
Estate 0.00 - - 8.20 12,910,405 17,179,846
Development
Co.( 2)
Zhongjiang
Holding Co. 5.17 7,251,872 10,842,715 8.97 14,136,560 18,801,625
Ltd.( 2)
?????????? ?????????? ?????????? ??????????
156,021,545 256,827,077 189,143,890 286,592,862
?????????? ?????????? ?????????? ??????????
(1) The cost as at 30 June 2010 and as at 31 December 2009 included 2
components: common stock and loans receivable.
(2 )The principal above represents the principal calculated according to the
Fund's accounting purpose, which is different from the loan principal calculated
in accordance with the legal agreements whereby the cost is paid prior to the
repayment of interest component.
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statement of Operations for the Period Ended 30 June 2010
Period from Period from
1 Jan 2010 to 1 January 2009 to
Note 30 Jun 2010 30 June 2009
US$ US$
Income
Interest income 294,949 140,341
Other income 1,209,875 -
????????? ?????????
Total income 1,504,824 140,341
---------------- ----------------
Expenses
Local taxes 8 2,561,411 (2,579,362)
Management fees 9,10(b) 1,879,810 3,409,216
Performance fees 9,10(b) 624,809 -
Legal and professional fees 845,973 214,353
Investment structuring costs - 1,486,431
Interest expenses 6 1,283 -
Other expenses 405,411 399,482
????????? ?????????
Total expenses 6,318,697 2,930,120
---------------- ----------------
Net investment loss (4,813,873) (2,789,779)
---------------- ----------------
Realized and change in unrealized
gains from investments
Net realized gains/(losses) from
investments 6,616,553 (1,153,529)
Net change in unrealized
gains/(losses) from investments 6,032,905 (421,719)
Net change in unrealized
(losses)/gains from investments
attributable to PACL II 10(a) (5,294,247) (2,890,568)
Net foreign exchange gains/(losses) 794,544 (110,781)
????????? ?????????
Net realized and change in
unrealized gains from investments 8,149,755 1,204,569
---------------- ----------------
Net increase/(decrease) in net
assets from operations 3,335,882 (1,585,210)
????????? ?????????
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statement of Changes in Net Assets for the Period Ended 30 June
2010
Share capital Treasury Retained
Note and share Capital shares earnings Total
premium surplus
US$ US$ US$ US$ US$
At 1 370,000,000 3,910,000 (26,215,000) 13,133,281 360,828,281
January 2009
Repurchase
and 7,10(a) (180,166,107) (2,093,083) - - (182,259,190)
cancellation
of shares
Repurchase 7 - - (8,754,715) - (8,754,715)
of shares
Net
increase in
net assets - - - 39,727,491 39,727,491
from
operations
?????????? ???????? ?????????? ?????????? ??????????
At 31
December 189,833,893 1,816,917 (34,969,715) 52,860,772 209,541,867
2009
Repurchase - - (7,807,254) - (7,807,254)
of shares
Net
increase in
net assets - - .- 3,335,882 3,335,882
from
operations
?????????? ???????? ?????????? ?????????? ??????????
At 30 June 189,833,893 1,816,917 (42,776,969) 56,196,654 205,070,495
2010
?????????? ???????? ?????????? ????????? ??????????
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statement of Cash Flows for the Period Ended 30 June 2010
Period from 1 Jan 2010 to 30 Year ended
Jun 2010 31 Dec 2009
US$ US$
Net increase in net assets from 3,335,882 39,727,491
operations
Adjustments
(Increase)/decrease in
operating assets
Purchase of investments - (67,714,500)
Disposal of investments 37,299,758 127,757,981
Net realized and unrealized (10,119,993) (87,002,647)
gains from investments
Amounts due from related (3,686) 7,542
parties
Other receivables 3,387,666 (3,561,837)
Other assets 663,284 691,532
Restricted cash 12,000,000 (12,000,000)
Increase/(decrease) in
operating liabilities
Amounts due to PACL II Limited (14,037,730) 115,042,310
Performance fee payable (13,800,185) 14,424,994
Provision for taxation (4,832,803) 19,825,944
Accrued expenses and other (1,008,240) 734,758
payables
?????????? ??????????
Net cash generated from/(used 12,883,953 (147,933,568)
in) operating activities
------------------ ------------------
Bank loans obtained (12,000,000) 12,000,000
Issue of shares - -
Repurchase of shares (7,807,254) (191,013,905)
?????????? ??????????
Net cash (used in)/generated (19,807,254) (179,013,905)
from financing activities
------------------ ------------------
Net (decrease)/increase in cash (6,923,301) (31,080,337)
and cash equivalents
Beginning balance 81,614,495 112,694,832
?????????? ??????????
Ending balance, representing 74,691,194 81,614,495
cash and bank balances
?????????? ??????????
Non-cash transactions
See Note 10(a) for the restructuring of the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to the Consolidated Unaudited Interim Financial Statements for the Period
Ended 30 June 2010
1 Organization
Pacific Alliance China Land Limited (the "Company") was incorporated on 5
September 2007 in the Cayman Islands. It is a closed-end Cayman Islands
registered, exempted company. The address of its registered office is PO Box
472, 2nd Floor, Harbour Place, Grand Cayman, KY1-1106, Cayman Islands. The
Company can raise additional capital up to the authorized share capital as
described in Note 7 below.
On 7 March 2009, the Company voluntarily delisted its ordinary shares from
the Channel Islands Stock Exchange. The Company's ordinary shares continue to
trade on the AIM Market of the London Stock Exchange.
The principal investment objective of the Company is to provide
shareholders with capital growth and a regular level of income from investments
in existing properties, new developments, distressed projects and real estate
companies in Greater China.
The Company's investment activities are managed by the Investment Manager,
Pacific Alliance Real Estate Limited. The Company has appointed Sanne Trust
Company Limited to act as the Custodian of certain assets of the Company and the
Company's Administrator and Registrar pursuant to the custodian agreement and
fund administration services agreement respectively.
The consolidated financial statements were approved by the Board of
Directors on 15 September 2010.
2 Summary of significant accounting policies
The following significant accounting policies are in conformity with
accounting principles generally accepted in the United States of America. The
Company applies the provisions of FASB ASC 946-10, Financial Services -
Investment Companies (formerly the AICPA Audit and Accounting Guide for
Investment Companies) (the "Guide"). Such policies are consistently followed by
the Company in the preparation of its consolidated financial statements.
(a) Principles of consolidation
These consolidated financial statements include the financial statements
of the Company and its subsidiaries (collectively the "Fund"). Subsidiaries are
fully consolidated from the date on which control is transferred to the Fund and
deconsolidated from the date that control ceases. Inter-company transactions
between group companies are eliminated upon consolidation.
The Fund uses wholly and partially owned special purpose vehicles ("SPV")
to hold and transact in certain investments. The Fund's policy is to
consolidate, as appropriate, those SPVs in which the Fund has control over
significant operating, financial or investing decisions of the entity.
Except when an operating company provides services to the Fund, investment
in an operating company is carried at fair value (refer to Note 2(c) below for
fair value measurement).
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
directors to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements and accompanying notes. The directors
believe that the estimates utilized in preparing the financial statements are
reasonable; however, actual results could differ from these estimates.
(c) Investments
The Fund holds investment securities which are unlisted and have limited
marketability. The Fund engages in secured lending transactions consisting of
repurchase agreements and other secured borrowings.
(i) Recognition, derecognition and measurement
Regular purchase and sale of investments are accounted for on the
trade date, the date the trade is executed. Costs used in determining realized
gains and losses on the disposal of investments are based on the specific
identification method. Cost includes legal and due diligence fees associated
with the acquisition of investments.
Transfer of investments is accounted for as a sale when the Fund has
relinquished control over the transferred assets. Any realized gains and losses
from investments are recognized in the consolidated statement of operations.
Investments are subsequently carried at fair value and changes in
fair value are presented in the consolidated statement of operations.
(ii) Fair value measurement
The Fund is an investment company under the Guide. As a result, the
Fund records its investments on the consolidated statement of assets and
liabilities at fair value, with unrealized gains and losses resulting from
changes in fair value recognized in the consolidated statement of operations.
Fair value is the amount that would be received to dispose of the
investments in an orderly transaction between market participants at the
measurement date, i.e. the exit price. Fair value of investments is determined
by the Valuation Committee, which is established by the Investment Manager and
the Board of Directors.
The fair value of unlisted or unquoted securities are based on the
Fund's valuation models, including earnings multiples (based on the budgeted
earnings or historical earnings of the issuer and earnings multiples of
comparable listed companies) and discounted cash flows. The Valuation Committee
also considers the relevant developments since acquisition of the investments,
the original transaction price, recent transactions in the same or similar
instruments, completed third-party transactions in comparable instruments,
reliable indicative offers from potential buyers and rights in connection with
realization. It adjusts the model as necessary for factors such as
non-maintainable earnings, tax risk, growth stage, and cash traps. Cross-checks
of primary techniques are made against other secondary valuation techniques.
In determining fair valuation of certain unlisted securities, the
Valuation Committee engages independent valuers which rely on the financial data
of investees and on estimates made by the management of the investee companies
as to the effect of future developments.
The Fund enters into secured lending transactions which are reported
as operating activities in these consolidated financial statements. Loans
receivable are recorded at the amount of cash advanced and the related interest
receivable under the loan agreements. Interest income is accrued using the rates
associated with the related loans. The valuation techniques applied usually
consist of discounted cash flow analysis which is the net present value of the
estimated future cash flows adjusted as appropriate for liquidity, credit,
market and other risk factors. The changes in fair value of loans receivable are
included in realized and unrealized gains and losses from investments.
Although the Valuation Committee uses its best judgment in
estimating fair value, there are inherent limitations in any valuation
technique. Estimated fair value may differ significantly from the value that
would have been used had a readily available market for such investments existed
and these differences could be material to the financial statements. Additional
information about the level of market observability associated with investments
carried at fair value is disclosed in Note 4 below.
(d) Cash and cash equivalents
Cash represents cash at banks and does not include restricted cash such as
fixed deposits pledged as security for the bank loans. Cash equivalents are
defined as those instruments which mature within 3 months of the date of
purchase.
(e) Bank loans
Bank loans are initially recognized at fair value, net of transaction
costs incurred and subsequently stated at amortized cost. Any difference between
the proceeds (net of transaction costs) and the redemption value is recognized
in the consolidated statement of operations over the period of the borrowing
using the effective interest method.
(f) Foreign currency translation
The books and records of the Fund are maintained in United States Dollars
("US$"), which is also the functional currency. Assets and liabilities, both
monetary and non-monetary, denominated in foreign currencies are translated into
US$ at year-end exchange rates, while income and expenses are translated at the
exchange rates in effect during the year.
The net realized and unrealized gains or losses from investments
denominated in currencies other than the functional currency include the
fluctuations arising from changes in exchange rates and the fluctuations arising
from changes in the market prices of securities held or sold short during the
year.
(g) Income taxes
The Fund may be subject to taxes imposed in other countries in which it
invests. Such taxes are generally based on income and gains earned. Taxes are
accrued on investment income, realized gains, and unrealized gains, as
appropriate, when the income and gains are earned. The Fund accrues for
liabilities relating to uncertain tax positions only when such liabilities are
probable and can be reasonably estimated. Such income and gains are recorded
gross of taxes in the consolidated statement of operations and taxes are shown
as a separate item in the consolidated statement of operations.
(h) Recognition of income and expenses
Interest income on bank balances is accrued as earned using the effective
interest method.
Loan origination income is recognized when the relevant services are
rendered.
Expenses are recorded on an accrual basis.
3 Concentration of risks
(a) Market risk
Market risk represents the potential loss in value of financial
instruments caused by movements in market variables, such as equity prices.
Investments are made with a focus on the Greater China. Political or
economic conditions and the possible imposition of adverse laws or currency
exchange restrictions in that region could cause the Fund's investments and the
respective markets to become less liquid and also the prices to become more
volatile.
The Fund's investments may have concentration in a particular industry or
sector and performance of that particular industry or sector may have a
significant impact on the Fund.
The Fund's investments may also be subject to the risk associated with
investing in private equity securities. Investments in private equity securities
may be illiquid and subject to various restrictions on resale and there can be
no assurance that the Fund will be able to realize the value of such investments
in a timely manner.
See Note 4 below for a discussion on the inputs in fair value measurement
of the Fund's investments.
(b) Interest rate risk
Interest rate risk arises from the fluctuations in the prevailing levels
of market interest rates which affect the fair value of financial assets and
liabilities and future cash flows. The Fund has bank accounts, restricted cash,
loans receivable and bank loans that expose the Fund to interest rate risk. The
Fund has direct exposure to interest rate changes in respect of the valuation
and cash flows of its interest bearing assets and liabilities. The Fund may also
be indirectly affected by interest rate changes in respect of the earnings of
certain companies in which it invests.
(c) Currency risk
The Fund has assets and liabilities denominated in currencies other than
the US$, the functional currency. The Fund is therefore exposed to currency risk
as the value of assets and liabilities denominated in other currencies may
fluctuate due to changes in exchange rates.
The net assets of the Fund are denominated in the following currencies:
30 Jun 2010 31 Dec 2009
US$ US$
Renminbi 93,711,913 146,624,339
United States Dollar 111,358,582 62,917,528
Others -
?????????? ??????????
205,070,495 209,541,867
?????????? ??????????
(d) Credit risk
The Fund is exposed to default risk by the counterparties of the loans
receivable. Whilst the loans receivable are structured to provide the Fund with
adequate collateral in the event of default, enforcement may be subject to the
legal system of the countries where the relevant agreements are entered. Even
where the contract is enforced, the collateral may not be sufficient to fully
compensate the Fund for default losses. In an attempt to mitigate the losses,
the Fund, where possible, obtains independent valuations of the collateral on a
regular basis and monitors the fair value of collateral relative to the loan
amounts plus accrued interest and where necessary, requires additional cash or
collateral from the borrower to manage its exposure. However, these valuations
do not guarantee the ultimate realizable value of the collateral.
The legal system of the countries in which the Fund invests vary widely in
their development, degree of sophistication, attitude, and policies towards
bankruptcy, insolvency, liquidation, receivership, default and treatment of
creditors and debtors. Furthermore, the effectiveness of the judicial system of
the countries in which the Fund invests varies, thus the Fund (or any entity in
which the Fund holds a direct or secondary interest) may have difficulty in
successfully pursuing claims in the courts of such countries. To the extent that
the Fund or an entity in which the Fund holds a direct or secondary interest has
obtained a judgement but is required to seek its enforcement in the courts of
the countries in which the Fund invests, there can be no assurance that the
court will enforce such judgement.
The Fund is also exposed to credit risk in respect of its investments in
debt securities, bank balances and amounts due from trade counterparties. The
bank balances are kept in a number of banks including UBS AG, Bank of Tianjin,
Shenzhen Ping An Bank and Xiamen International Bank.
(e) Liquidity risk
As the Company is closed-end, it is not exposed to redemptions of shares
by its shareholders.
The Fund is exposed to liquidity risk as some of the investments of the
Fund are illiquid while some of the Fund's liabilities are with short maturity.
The Fund's bank loans are fully collateralized with cash. Illiquid investments
include any securities or instruments which are not actively traded on any major
securities market or for which no established secondary market exists where the
investments can be readily converted into cash. Reduced liquidity resulting from
the absence of an established secondary market may have an adverse effect on the
prices of the Fund's investments and the Fund's ability to dispose of them where
necessary to meet liquidity requirements. As a result, the Fund may be exposed
to significant liquidity risk. Details of the maturity analysis on loans
receivable are set out in Note 5 below.
China currently has foreign exchange restrictions, especially in relation
to the repatriation of foreign funds. Any unexpected foreign exchange control in
China may cause difficulties in the repatriation of funds. The Fund invests in
China and is therefore exposed to the risk of repatriating funds out of China on
a timely basis to meet its obligations. See Note 3(c) above for exposures to
Renminbi.
The Fund has the ability to borrow in the short term and this is subject
to certain limitations, including the total amount of all borrowings outstanding
at any time shall not exceed 50% of the Fund's total assets at such time.
4 Investments
The fair value hierarchy prioritizes inputs to measure fair value and
gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurements) and the lowest priority
to unobservable inputs (level 3 measurements).
The three levels of the fair value hierarchy are described below:
Level 1 Inputs to measure fair values are unadjusted quoted prices in
active markets that are accessible at the measurement date for identical
unrestricted assets or liabilities.
Level 2 Inputs to measure fair values are quoted prices in markets that
are not active, quoted prices for similar assets in active markets or prices or
valuations for which all significant inputs are observable, either directly or
indirectly.
Level 3 Inputs to measure fair values are both significant to the fair
value measurement and unobservable.
Inputs to measure fair values broadly refer to the assumptions that market
participants use to make valuation decisions, including assumptions about risk.
Inputs may include price information, volatility statistics, specific and broad
credit data, liquidity statistics and other factors. An asset or a liability's
level within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. However, the determination of
what constitutes "observable" requires significant judgment. The Valuation
Committee considers observable data to be such market data which is readily
available, regularly distributed or updated, reliable and verifiable, not
proprietary and provided by multiple, independent sources that are actively
involved in the relevant market. The categorization of an asset or a liability
within the hierarchy is based upon the pricing transparency of the asset or
liability and does not necessarily correspond to the Valuation Committee's
perceived risk of that asset or liability.
Level 1
Investments in listed stocks and derivatives that are valued using quoted
prices are generally classified within level 1 of the fair value hierarchy.
As at 30 June 2010, the Fund did not have any investments that were
categorized as level 1 within the fair value hierarchy (2009: Nil).
Level 2
Investments in listed stocks for which trading is restricted for a certain
period of time and for which the restriction is applicable to market
participants in general (for example, legal person shares containing lock-up
periods) are valued using the last traded prices of the listed stocks after
factoring in discounts for liquidity. Such investments are generally classified
within level 2 of the fair value hierarchy. The discounts for restrictions are
estimated by the Valuation Committee by analyzing the length of the restriction
period and are as follows:
Discount for restrictions Length of restriction period
5% 1 to 6 months
10%, reducing over the period 7 to 12 months
25%, reducing over the period More than 12 months
As at 30 June 2010, the Fund did not have any investments that were
categorized as level 2 within the fair value hierarchy (2009: Nil).
Level 3
Assets are classified within level 3 of the fair value hierarchy if they
are traded infrequently and therefore have little or no price transparency. Such
assets include investments in unlisted stocks and bonds and loans receivable.
Valuation methodologies utilized by the Valuation Committee include comparable
transactions or performance multiples, latest round of financing, and are
supported by independent valuation of underlying assets. The selection of
appropriate valuation techniques may be affected by the availability of reliable
inputs, including management accounts or locally audited financial statements of
the underlying investee companies. In some cases, one valuation technique may
provide an appropriate estimation of fair value while in other circumstances,
multiple valuation techniques may be used. Once used, the methodology will
continue to be used until a new, more appropriate method is determined.
The fair value of loans receivable is determined using multiple inputs,
including terms of maturity, estimated cash flows under the loans, valuation of
the underlying collateral and credit assessment of the borrowers. The Valuation
Committee considers the cost of the loans receivable generally approximate their
fair values since the loans have relatively short maturity and the interest
rates charged reflect market rates.
The following table summarizes the assets which are carried at fair value
on the consolidated statement of assets and liabilities by captions and by
levels within the fair value hierarchy.
Assets at fair value as at 30 June 2010
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Investments - stocks - - 183,321,152 183,321,152
Investments - bonds - - 48,375,587 48,375,587
Investments - loans receivable 25,130,338 25,130,338
(Note 5) - -
?????? ?????? ????????? ?????????
- - 256,827,077 256,827,077
?????? ?????? ?????????? ??????????
Assets at fair value as at 31 December 2009
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Investments - stocks - - 191,611,208 191,611,208
Investments - bonds - - 44,976,526 44,976,526
Investments - loans 50,005,128 50,005,128
receivable (Note 5) - -
?????? ?????? ?????????? ??????????
- - 286,592,862 286,592,862
?????? ?????? ?????????? ??????????
As at 30 June 2010, investments of US$179,663,867 (2009: US$184,546,166)
were held directly by the Fund, and investments of US$77,163,210 (2009:
US$102,046,696) were held through jointly controlled entities with Pacific
Alliance Asia Opportunity Fund L.P.
The following table summarizes the changes in fair value of the Fund's
level 3 instruments.
Investments -
Investments Investments loans
- stocks - bonds receivable Total
US$ US$ US$ US$
At 1 January 2009 72,745,627 40,000,000 144,302,049 257,047,676
Purchase of 67,714,500
investments - - 67,714,500
Sale/repayment of (25,826,485)
investments - (85,501,227) (111,327,712)
Net realized gains - - 16,620,660 16,620,660
Net change in
unrealized gains/ 76,977,566
(losses) 4,976,526 (25,416,354) 56,537,738
????????? ????????? ?????????? ??????????
At 31 December 2009 191,611,208 44,976,526 50,005,128 286,592,862
-
Purchase of
investments - - -
Sale/repayment of (13,474,132)
investments - (26,411,646) (39,885,778)
Net realized gains - - 6,616,553 6,616,553
Net change in
unrealized gains/ 5,184,077
(losses) 3,399,061 (5,079,697) 3,503,440
????????? ????????? ?????????? ??????????
At 30 June 2010 183,321,153 48,375,587 25,130,338 256,827,077
????????? ????????? ?????????? ??????????
Total net change in unrealized gains on level 3 instruments as shown above
are presented in the consolidated statement of operations.
5 Investments - loans receivable and bonds
As at 30 June 2010, the Fund had loans receivable from unaffiliated
parties amounting to US$25,130,338 (2009: US$50,005,128). The loans are due to
mature in the next 6 months. The Fund held collateral on these loans receivable,
including land, shares of the borrowers, other listed or unlisted equity
investments or key assets of the borrowers. The interest rates charged in
accordance with loan agreements generally range from 10% to 35% per annum (2009:
10% to 35% per annum). For the period ended 30 June 2010, total realized gains
recognized on these loans amounted to US$6,616,553 (year ended 31 December
2009: realized gains US$16,620,660), which is calculated based on the
apportionment of the repayment amount based on the effective interest rate.
As at 30 June 2010, the Fund had a bond investment from an unaffiliated
party amounting to US$48,375,587 (31 December 2009: US$44,976,526). The Fund
held collateral on the bond investment in the form of assets of the bond issuer
and its subsidiaries. The fair value of the investment is determined by the
Valuation Committee. For the period ended 30 June 2010, total unrealized gains
recognized on the bond amounted to US$3,399,061 (Year ended 31 December 2009:
US$4,976,526).
6 Bank loans
In order to finance the investment projects in different currencies, the
Fund may from time to time enter into loan agreements with banks which are fully
secured by deposits in currencies other than the denomination of the loans held
directly by the Fund or related entities. In the event that amounts under the
loan agreements are due and not paid, the banks are entitled to receive an
amount of the deposits equal to the unpaid amount.
As at 30 June 2010, there were no bank loans. As at 31 December 2009, one
bank loan was drawn from a bank which amounted to US$12,000,000 and the loan
matured and was r
Datum: 16.09.2010 - 09:21 Uhr
Sprache: Deutsch
News-ID 42641
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Town:
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Kategorie:
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"Interim Results for the six months ended 30 June 2010"
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